The Landlord and Tenant Act 1954 has over the last fifty years proved to be difficult to deal with and was seen as creating great imbalance between the rights of the landlords on the one hand and the tenants on the other. Significant reforms to the Landlord and Tenant Act 1954 came into force on 1 June 2004, introducing procedures and time limits relating to the termination and renewal of leases of business premises.
The reforms are contained in the Regulatory Reform (Business Tenancies) (England and Wales) Order 2003 - SI 2003 No. 3096 (RRO). As Sahonte and Watson point out “The scheme of the Act essentially remains the same, however, reflecting the Government's position that the Act is philosophically sound and fair to both landlord and tenant whilst underpinning the free operation of the property market. Some will say that this is a missed opportunity, which may not come again. It is not really possible to set out in detail the exact nature of all the changes provided by the Order. ”
These reforms seek to redress much of the unfairness in the legislation in an effort to find a balance between the competing and conflicting interests of landlord and tenant. Whilst these aims are achieved to a certain degree it is argued that the act has also created a number of new traps, which affect the balance of the landlord and tenant relationship . Although it will be concluded that any amendment to the previous Landlord and Tenant rules contained within the 1954 act provides a significant step forward and an improvement in the entire landlord and tenant relationship.
A small but potentially significant amendment has been made to s23. At present where the tenant has the lease, but does not carry on the business, there is no right to a renewal tenancy. This might arise where the tenant controls a company, which operates the business. Now, where the tenant is a one or more individual, they will have a right to a new tenancy provided that they control the occupying company. Similarly where the tenant is a company, protection will arise where the occupation of the premises is by individuals, which control the company.
The procedure for obtaining a court order authorising the parties to enter into a tenancy, excluding security of tenure or sanctioning an agreement for the surrender of an existing tenancy, has been abolished. It has been replaced by a procedure that operates between the parties - and this has to be closely followed, or the landlord will be at risk of granting a new tenancy that still enjoys the protection of the original Act.
The legal costs incurred by the parties in ensuring compliance with the new procedures are likely to exceed the costs they would otherwise have incurred in obtaining the sanction of the court. Before the changes, only tenants could make applications to the court for a new tenancy. Now landlords are able to make applications too. This new right is particularly valuable where a landlord wants to bring a tenancy to an early conclusion - for example, in order to redevelop the premises. The termination of the tenancy provides the opportunity to apply for the determination "interim rent", and the new provisions of will now enable a tenant, as well as a landlord, to apply for such a determination, so that the rent of over-rented premises may be reduced as from "the appropriate date "
In the case of over-rented premises, the landlord cannot postpone the date of a reduction in rent by serving a s 25 notice to expire at the latest possible date (12 months after service of the notice), because it is provided by s 24B(2) that, where a landlord has given a notice under s 25, the "appropriate date" is the earliest date of termination that could have been specified in the landlord's notice. The over-rented tenant can, of course, also obtain the right to a determination of an interim rent by serving a s 26 request; however, he may be unaware of this right or any rights relating to interim rent until prompted to take legal advice by service of a s 25 notice. A solicitor who thus prompts an interim rent application by an over-rented tenant may have an unhappy landlord client.
Changes in the timescales will mean that landlords must now get their strategy worked out early. Previously, a landlord had to wait up to four months after serving a section 25 notice to see whether a tenant applied for a new tenancy. Under the reforms, landlords no longer have to wait and can force the issue and apply to the court at an earlier date, depending on whether the grant of a new tenancy is opposed. This is likely to speed up the process. If the tenant does not want a new tenancy, it should inform the court and the landlord's application will then be dismissed. There is potential danger for a landlord who opposes the grant of a new tenancy and then has a change of mind or is unable to proceed with the original plan. As the law now stands, this landlord could face a claim by the tenant for compensation.
Tenants can now apply for compensation where no application for renewal is made because of misrepresentation or concealment or an application is withdrawn because of misrepresentation or concealment.
There is also a new form of section 25 notices . If the landlord is not opposing the grant of a new tenancy, the new s 25(8) stipulates that the notice shall not have effect unless it sets out the landlord's proposals as to:
(i) the property to be comprised in the new tenancy;
(ii) the rent to be payable under the new tenancy; and
(iii) the other terms of the new tenancy.
A failure on behalf of the landlord to make genuine realistic proposals may possibly invalidate the notice, although the "important note for the tenant" in the relevant prescribed form does emphasise that the proposed terms are no more than "suggestions as a basis for negotiation".
The amended act also provides for a new procedure following the service of a s 25 notice. Previously, the landlord had to wait and see whether, within the specified time limits, the tenant would (i) serve a counter-notice indicating that he was unwilling to give up possession; and (ii) apply to the court for an order for the grant of a new tenancy. The requirement for service of a counter-notice has now been abolished and, more importantly, the statutory provisions relating to an application to the court are different .
The Regulations are designed, in part, to avoid the need for unnecessary court applications. The positive need to issue a court application within the two- to four-month window from date of service has now gone. The deadline for applications is now the termination date specified in the s25 notice, or in the case of a s26 request, the day preceding the date given for the commencement of the renewal tenancy. The parties can extend the deadline date by written agreement made before the expiry of the deadline. There may be problems securing such written agreement. The busy practitioner representing the tenant may prefer to issue the application within the time limit and then seek a stay of proceedings if negotiations are in hand.
A major change in court applications is that in respect of notices/requests served on or after 1 June, landlord or tenant can make the application. Up to now only the tenant could make the application. This gave the tenant control over the pace of progress, as sometimes the tenant would issue toward the end of the two- to four-month period, and then not serve the court papers until towards the end of the two-month validity period. Now, a landlord who wants to make progress can issue the court application as soon as he has served his s25 notice, or served his counter-notice to a s26 request.
Other difficulties with the old procedure for renewal were that only a landlord could apply for interim rent and If a landlord wanted possession, he could only react to tenant's application for a tenancy and could not take the initiative. The strict timescales also proved to be a trap for the unwary and most court applications were protective and therefore the old rules raised issue as to unnecessary cost and expense. The new rules are more even handed as the requirement for tenant to serve counter notice dispensed with and both parties can apply to the court for the grant of new tenancy.
The amended s 24(1) of LTA 1954 enables either the landlord or the tenant to apply to the court for an order for the grant of a new tenancy. Such an application may be made at any time between the service of the s 25 notice and the end of the "statutory period" as defined in the new s 29A of LTA 1954 (being, in a case where the landlord has given a notice under s 25, the date specified in the notice as the date at which the existing tenancy is to come to an end). However, this time limit is not absolute; it may be extended from time to time by agreement between the landlord and the tenant in the circumstances set out in the new s 29B.
The first such agreement must be made before the end of the statutory period, and must specify an agreed period during which an application may be made, expiring after the end of the statutory period. Further extensions may be agreed, but any such agreement must be made before the end of the period specified in the current agreement. It has been clear since Kammins Ballrooms v Zenith Investments that the parties could agree to waive the time limits under the Act, but few dared risk it. A new section 29B explicitly allows the parties to agree to extend the period for applying to the court, provided they do so before the current period expires .
There are changes of timing and substance. The commencement date for interim rent will be the earliest date that could have been specified in the s25 notice or s26 request irrespective of the date actually specified. This means that in practice the date for commencement will be the contractual termination date or six months after the date of service of the notice/request, whichever is the later. An application to fix the amount of interim rent may be made by either party in respect of notices served on or after 1 June 2004. If an application is made, interim rent will run from the commencement date for it, irrespective of the actual date of the application.
The amount of interim rent will now generally be the amount of the new rent in those cases where the tenant is taking a renewal tenancy of the whole of the demised premises. There are now several different bases of valuation Prior to the enactment of the new legislation the interim rent derived from a valuation based on a tenancy from year to year. This is generally considered to produce a rent somewhere between 10 to 15% less than the open market valuation.
This basis will continue where the renewal application is opposed. However where renewal is uncontested (subject to certain exceptions) the interim rent will be the same as the rent for the renewal tenancy. The exceptions are complex, but are designed to allow an adjustment if unfairness would result - specifically where market rents change between the effective date for payment of the interim rent and the date of commencement of the renewal tenancy, or significantly different terms are agreed for the renewal tenancy as compared to the previous one.
The court has discretion to vary the amount where there are special circumstances. This might arise where the amount of the new rent would have been substantially different if it had reflected market conditions at the commencement of the interim rent period. In other cases, the amount of interim rent will be determined in accordance with the existing method.
An amendment to s27 of the Act confirms the decision arrived at in Esselte AB v Pearl Assurance , to the effect that a tenant may vacate prior to the contractual termination date, and incur no continuing liability, as tenant, even if an application has been made to the court. The amendment to s27(2) provides that a tenant holding over under the Act may now give three months' notice to terminate, and this does not now have to expire on a quarter day.
Section 40 is amended under the new regime this section allows landlord and tenant to find out information from the other such as who has an interest in the property & details of the interest and during the last 2 years of tenancy and replies must be received within one month. The old regime had no teeth and provided no penalty for non-compliance this is amended in the new provision, which obligates the parties during a six-month period and to give notice of transfer, passes responsibility of continuing compliance to successor. The new section also provides the court with the jurisdiction to order compliance and award damages.
Perhaps the biggest change can be felt under the new rules of contracting out. There were many disadvantages of the old system such as the fact that there was a need for consent orders for excluded tenancies and agreements for surrender. The old system was also bureaucratic, Cumbersome Time-consuming, Expensive. This coupled with the fact that the process was administrative process rather than a judicial one made the whole system almost impossible to work with. He rate of refusal was low and was of doubtful effectiveness.
The new procedure is much different from the old system and in fact schedule 1 of the prescribed form explains the key benefits which the tenant gives up and these are listed as, security of tenure, right to compensation, power of court to fix rent and the importance of taking professional advice. The new rules provide a 14 day cooling off period, and that the notice be served on the tenant. The Tenant must sign a simple declaration that he or she has received the health warning notice and accepts the consequences of entering into the agreement. The new rules also provide an alternative of statutory declaration – where the parties don’t want to wait 14 days. In both cases a reference to the health warning notice, and to the declaration or statutory declaration needs to be contained in or endorsed on the Lease (or agreement to surrender).
The practical advantages to this system are that it is less expensive as there is no court fee of £130 documentation more straightforward. The health warning is in plain English, and ensures that the tenant really is given some idea of what he or she is giving up which has proved to be quite important. It is suggested that this scheme is also likely to operate much more speedily than the old system.
These advantages aside there appears to be a great many pitfalls and traps evident with this new system. Serving the notice appears to be the first of these. Notice is to be served on the tenant – does this mean that as well as sending the package to the tenant's solicitors, the notice should be served separately on the tenant? Clearly if the notice is to be relied on, there must be evidence of the service of the notice.
The tenant may wish to give authority to its solicitor to accept service, but if a landlord wishes to rely on this he should seek written evidence of that authority. Alternatively the landlord may send the notice in duplicate requesting the tenant to acknowledge receipt by signing and returning the duplicate copy.
The notice contains very little detail about the proposed transaction – simply the name of the parties and their addresses. It doesn't even require the property to be identified, let alone the terms of the tenancy.
Under paragraph 3 of Schedule 2 the declaration to be made by the tenant is to be made "before the tenant enters into the tenancy to which the notice relates". The landlord will need to be satisfied that, if there have been changes to the original form of tenancy; the original notice still applies to the tenancy finally agreed.
Under the old arrangements for court order, case law only if the change went to the fundamental terms of the tenancy would the court order be ineffective. While it is likely that the new law will take account of decisions such as this, until the law is tested, there will be no certainty. The safest course where there are significant changes may be to adopt the statutory declaration route. An alternative may be to include an express reference in the lease provision acknowledging that the lease is excluded to the specific notice (& its date) with confirmation that the notice does apply to the tenancy granted by the lease.
Whilst the amended Landlord and Tenant Act goes some way in addressing the inequality between Landlord’s and Tenants it is argued that it does not go far enough, and that the recommendations contained within The Code of Practice for Commercial Leases, particular those on upwards only rent review, go further. The government in April 2002 published the Code of Practice. The code contained various recommendations in relation to commercial lease provisions, including a recommendation that alternatives to an upwards only rent review (UORR) should be offered to tenants . The consultation paper sets out six options on UORRs. The first of these is that there should be no change and it is unlikely that this will be the option chosen by the government. The second proposal is to ban UORR’s. The proposal is that requiring rents to be reviewed on an upward or downward basis would prohibit UORRs.
Review provisions that enabled the landlord but not the tenant to initiate a review would also be prohibited. Rent reviews that operate by way of agreed fixed increases or indexation would not be caught by this proposal. The third option proposed is to Ban UORRs but allow a floor of initial rent. This is a variation of the second option above, whereby the legislation requires upwards or downwards reviews, but with a minimum rental level set at the initial rent. It might also provide for a maximum increase. The fourth option is to allow a tenant to break where a rent review would lead to higher rent than market levels. While allowing a tenant to break would give tenants the ability to avoid paying more than the open market rent, it would be at the cost of relocating to and fitting out other premises. Also, it would no doubt lead to disputes and litigation over the meaning of open market rent and the validity of a tenant's break notice.
The fifth option is to apply a statutory limit on lease length. The difficulty with this suggestion is that many tenants require longer leases because of high fitting-out costs and the certainty of being able to trade from a particular location, and a maximum length of lease will not be acceptable to such tenants, unless the lease includes an option to renew on certain terms. The final option that is proposed is to make option pricing compulsory, although this option appears to be impractical and difficult in practice to enforce and police. The British Property Federation (BPF) believes that only the first three options will come under serious consideration.
The BPF feels that this is no longer an argument on behalf of small businesses for 'fairer' lease terms but, rather, an HM Treasury-driven argument based on UK competitiveness and the feeling that UORRs are in some way 'unfair'. Many tenants would welcome such a change as UORRs hamper the flexibility of the UK economy and dissuades inward investments.
The reforms will have a major impact on court business. Early widespread opinion is that it is likely to increase litigation. A dilatory approach can no longer be adopted in applications for lease renewals. Applications used to be issued and then matters left, and only resurrected when negotiations failed. Under CPR Part 56, these applications are subject to active case management. An enormous amount of time and effort has been invested in updating the Landlord and Tenant Act 1954.While many of these changes are to be welcomed, the net effect in the short term will be to increase litigation, as new issues fall to be determined. Associated costs for both landlords and tenants will also increase while the parties come to terms with the new regime.
Whether or not the new regime will result in a balancing of the costs and a balancing of the rights for landlord and tenant remains to be seen, it would certainly seem that a clear attempt has been made to improve the situation. It is argued that this is an admirable attempt but that it does not go further enough in addressing the balance. The proposals for the amendments to the upwards only rent reviews sounds more promising and it would certainly help recreate the balance between landlord and tenant perhaps more noticeably than the current proposals do although again it is difficult to envisage the practical reality. It is certainly the case that all areas of business and commercial tenancies were in need of a radical overhaul and any improvement made to the act is arguably is an improvement and goes someway to readdressing the balance between landlord and tenant.
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